More about the Municipal Cost Index

The Municipal Cost Index (MCI) made its first appearance in American City & County in September 1978. It was designed to determine the rate of inflation of municipal cost — the cost of providing services to residents of our cities and counties.

The index is useful to local government managers in at least four ways:

To provide the manager with "a feel" for price trends which may affect the city or a particular department allowing time to minimize the effects of a budget shortfall;

To help control price increases for commodities purchased by a city or county through monitoring of price levels for commodities purchased in quantity, thus making inflationary price jumps more visible;

To measure the inroads of inflation on city expenditures over time.

The Municipal Cost Index developed by American City & County is designed to show the effects of inflation on the cost of providing municipal services. The MCI draws on the monthly statistical data collected by the U.S. Departments of Commerce and Labor as well as independently compiled data to project a composite cost picture for the municipal budget officer or operating department manager.

The composite index is adjusted by changes in the cost of materials and supplies, wages and contracted-for services. It is a weighted average of the more detailed price indexes measuring consumer cost fluctuations, industrial commodity wholesale prices, and construction contract costs. The weighting factors used were determined specifically for American City & County and reflect the composition of local government purchases in the base year of the MCI, established as 1967. In April 1988, American City & County switched to a base year of 1982. It is a fixed-weighted type of index, reflecting only changes in price over specific periods of time at the national level.

Costs of labor, materials and contract services are all factored into the composite MCI. Major indicators of these items used for the MCI include the Consumer Price Index, the Wholesale Price Index for Industrial Commodities (now known as the Producer Price Index) and the construction cost indexes published by the U.S. Department of Commerce, respectively.

The Consumer Price Index (CPI) is used in the composition of the MCI to measure the upward pressure expected on municipal wage rates. Over 8.5 million workers are covered by collective bargaining contracts which provide for increases in wage rates based on increases in the CPI, according to the U.S. Department of Labor. And the number of such clauses is on the increase. During 1976, DOL reported, escalator provisions were added to 51 contracts covering 281,000 workers.

The CPI also measures other municipal cost pressures, however. Many health and welfare program transfer payments paid out of local budgets are tied to this index.

The CPI is a statistical measure of change in the prices of goods and services in major expenditure groups such as food, housing, clothing, transportation, and health and recreation for urban consumers. It measures the purchasing power of the consumer dollar by comparing the cost of a "market basket" of goods and services over time.

There are actually two CPIs compiled and reported by the Department of Labor each month: a CPI for Urban Wage Earners and Clerical Workers and a CPI for All Urban Consumers. Since these separate indices were started in January 1978, there has been little difference between them. The MCI calculation uses the CPI for All Urban Consumers (CPI-U).

The Producer Price Index (PPI) for Industrial Commodities is incorporated into the MCI to measure cost fluctuations in goods and materials. Purchases of materials and supplies total about 20 percent of the typical municipal budget.

The PPI was designed by the DOL to show the rate and direction of price movement for individual commodities and groups of commodities. The index measures "real" price changes — changes not influenced by differences in quality, quantity or terms of sale. All systematic production of goods and materials are included in the PPI except for farm products and foods. Items which would be so individualistic in nature as to be separately priced are not included in the index.

Commodities included range from chemicals to motor vehicles, from construction machinery to fuels, from footwear to metal products. Values cranked into the PPI are f.o.b. production point and exclude excise taxes. Goods sold at retail directly from the factory are also excluded when calculating this index.

Contract services from janitorial contracts to construction costs take about 30 percent out of municipal treasuries. The most significant portion of this cost is that amount spent on capital construction, and for this reason, the construction cost indexes of the Department of Commerce are used to track the changes in the cost of contract services in the MCI.

The construction cost index reflects changes in the costs of materials, skilled labor, and unskilled labor in both general construction and building construction. The Department of Commerce composite construction index is derived from separate indexes for commercial facilities, residential housing construction, utility construction, highway and general construction and many other contract construction indexes. We have selected those indexes most reflective of the types of construction expected in the municipal area for the development of the MCI.

No single price index will provide inflation relief to every community across the country. The Municipal Cost Index, however, will provide a yardstick against which locally developed indexes can be gauged.

To determine the cost change over time in percent from one period to another, simply obtain the difference between the two points and divide by the earlier index level. For instance, the percent increase in the cost of doing municipal business from 1967 through 1977 (using the average MCI for 1977 or 199.5) is calculated:

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